The chief executive of Yorkshire Water has admitted his industry must “show new standards of public accountability” after a senior Minister warned major utilities firms that they must clean up their act or face tougher regulation.

Richard Flint described the speech by Environment Secretary Michael Gove, who told company bosses they have not been acting “in the public interest”, as a “wake-up call for the sector”.

The water industry needs to show new standards of public accountability, be much more transparent about its complex financial structures and show a step-change in services not seen since the late 90s.

Richard Flint, Yorkshire Water

In a speech at an industry conference, Mr Gove accused water companies of “playing the system” at the expense of consumers and the environment.

In a strongly-worded intervention, Mr Gove told the Water UK conference: “Far too often, there is evidence that water companies - your water companies - have not been acting sufficiently in the public interest.

“Some companies have been playing the system for the benefit of wealthy managers and owners, at the expense of consumers and the environment.

“Particularly in the last decade, some companies have not been as transparent as they should have been.

“They have shielded themselves from scrutiny, hidden behind complex financial structures, avoided paying taxes, have rewarded the already well-off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist for far too long.”

Mr Flint said in response: “This is a wake-up call for the sector. The water industry needs to show new standards of public accountability, be much more transparent about its complex financial structures and show a step-change in services not seen since the late 90s.”

Yorkshire Water, the water supply and treatment company which services the majority of the region, was one of several major firms that came in for criticism.

Mr Gove said four companies, Thames, Southern, Anglian and Yorkshire, “make particularly keen use of sophisticated financial engineering” to minimise their tax obligations.

He added: “They have set up multi-layered corporate structures of dizzying complexity involving multiple subsidiaries, some based offshore.

“The use of these offshore entities makes company affairs more opaque and their financial activities less transparent, and customers have an absolute right to question their use.

“As well as Thames, Southern and Yorkshire – have also set up offshore financial structures in the Cayman Islands.

“The stated reason was to enable smoother access to global bond markets. But the rules were changed, yet the offshore firms continued to exist. The companies concerned have maintained the structures that enable them, among other things, to avoid proper scrutiny.”

In his speech, Mr Gove warned that Yorkshire Water’s balance sheet was made up of 75 per cent debt, much higher than the 60/40 split between debt and equity advised by regulator Ofwat.

The 40 per cent is designed as a ‘buffer zone’ to protect companies from financial shocks and ensure they have enough money to innovate, and push ahead on service and performance.

Mr Gove said: “But there are owners of individual water companies who have decided to play the debt game differently.”

He added: “Now this may be good news for the investors in these companies but it is less so for customers and for investment in the environment.

“Compared to the other water companies, whose gearing remains around 60 per cent, these companies now have less capacity to cope with risks and shocks.”

Mr Gove noted that chief executives and board members of the privatised water companies “are very handsomely remunerated”, pointing out that Yorkshire Water’s chief executive earns £1.2m a year.

Yorkshire Water announced in October that it was to close its offshore subsidiary companies in the Cayman Islands after being criticised for its complex financial arrangements. It is understood this will have taken place by the summer.